FINANCE
a hit . In January 2020 , the Sacramento City Council voted to sell $ 100 million in bonds — $ 50 million this year , with another $ 50 million for next year or later — to use as gap financing for worthy projects , and it would serve as seed capital to attract much bigger pots of private , state and federal money . Now those bond sales are on hold because the city used the Measure U money that backed them to plug budget holes caused by the recession .
Cancellation of the bonds had an immediate impact on several projects nonprofit developer Mercy Housing California was considering in the region . It has now put those ideas on hold , says Stephan Daues , Mercy ’ s regional director of real estate development . Instead , “ We ’ re in the more typical sort of state funding pool that creates so much uncertainty ,” he says , so Mercy will be proposing far fewer projects .
Developers have another pandemic economy problem : The value of tax credits like those denied to CADA is eroding . Credits are the largest source of financing for affordable housing developments nationally .
But with the downturn , investors are willing to pay less for them , partly because nervous investors have pulled back . So prices have fallen , which means less money for affordable developments . Daues says he ’ s seen about a 10-percent drop in the price of credits , cutting the amount of equity coming in on specific projects . Mercy is converting the Capitol Park Hotel Temporary Shelter in downtown Sacramento into housing for those transitioning from homelessness , a $ 60 million venture that would be covered in part by about $ 28 million in credits . But the price drop means those are now worth about $ 25.5 million — a $ 2.5 million reduction Mercy needs to make up elsewhere .
Lenders also may be scared by market-rate components that often are part of affordable developments to improve cash flow . Saunders says a 159-unit apartment project that CADA is developing at S and 17th streets in Midtown Sacramento includes market-priced units and 11,000 feet of ground-floor retail . Both help the
“ We ’ re almost numb to being in turmoil . What doesn ’ t change is need . As long as there ’ s need , there will be a way of figuring out how to do deals .”
GEOFF BROWN President , USA Properties Fund
project ’ s cash projections . But one lender pulled out , frightened by the sliding economy ’ s possible effect on the performance of both . “ We definitely got caught in the pandemic squeeze there ,” says Saunders .
Then there are the headwinds that even conventional developers are up against . Lenders have tightened their terms by requiring that projects pencil in higher vacancy rates , says Daues . Building departments have been closed or limited , increasing approval times and driving up costs , according to Jeree Glasser-Hedrick , Northern California vice president at the nonprofit Jamboree Housing Corporation in Irvine . Lumber prices are up , the shipping of materials is taking longer , and there are pandemic-related construction delays when workers contract the virus , says Carol Ornelas , CEO of Stockton-based nonprofit Visionary Home Builders of California . Appliances — refrigerators , washing machines and more — are taking weeks to be delivered , delaying the lease-up of apartments ( the time period for a new property to attract tenants and reach stabilized occupancy ), says Roberto Jiménez , CEO at Mutual Housing California .
More worrisome , the downturn ’ s lasting impact on affordable housing might not be felt for a few years . It was in large part the state ’ s deficit coming out of the Great Recession that prompted former Gov . Jerry Brown to axe redevelopment agencies starting in 2012 . Those had been an important source of money for affordable building .
‘ What doesn ’ t change is need ’
Not all the news is bad . Likely slowdowns in retail and office construction , which accompany a struggling economy , should help level off construction costs , says Geoff Brown , president at the private Roseville-based USA Properties Fund , which builds both affordable and conventional projects . For private developers like him , affordable projects remain attractive because government subsidies help make the financing work and because demand for affordable units won ’ t go away anytime soon . And as businesses close , retail and office space may become available for conversion to affordable housing and might
64 comstocksmag . com | January 2021